How you can use Superannuation to reduce your tax

Superannuation is one of the most effective ways to legally reduce your tax because contributions and investment earnings are generally taxed at a flat concessional rate of 15%, which is often significantly lower than your marginal income tax rate (up to 45% plus Medicare levy). 

Lets’ look at 4 of the more common ways to reduce tax using superannuation.

1. Pre-Tax (Concessional) Contributions

These strategies reduce your taxable income directly, meaning you pay less income tax to the Australian Taxation Office (ATO). 

• Salary Sacrifice: Arrange with your employer to pay a portion of your pre-tax salary into your super.

• Personal Deductible Contributions: If your employer doesn't offer salary sacrifice (or if you are self-employed), you can make a voluntary contribution from your bank account and claim a tax deduction on your next tax return.

• Note: You must submit a ‘Notice of Intent to Claim’ form to your fund and receive an acknowledgment before lodging your return.

• Concessional Cap: The total of these contributions (including employer-paid super) is capped at $30,000 for the 2025–26 financial year.

• Carry-Forward Rule: If your total super balance is under $500,000, you may be able to use unused portions of your cap from the last five years to contribute more than the annual $30,000 limit. 

2. Offsets and Government Contributions

These options provide direct tax credits or extra payments from the government based on your contributions. 

• Spouse Contribution Offset: If your spouse earns less than $37,000, you can make an after-tax contribution to their account and receive a tax offset of up to $540.

• Government Co-contribution: If you are a low-to-middle income earner (earning less than $62,488) and make an after-tax contribution, the government may match it with up to $500.

• Low Income Super Tax Offset (LISTO): If you earn $37,000 or less, the government automatically refunds up to $500 of the tax paid on your concessional contributions back into your super account. 

3. Lower Tax on Investment Earnings 

Money held inside super is in a ‘low-tax environment’. Here are 3 things to consider.

• Accumulation Phase: Investment earnings such as interest and dividends, are taxed at a maximum of 15%.

• Retirement Phase: Once you start a pension, usually after age 60, earnings on those assets can become tax-free.

• Capital Gains: Assets held within super for over 12 months receive a one-third discount, making the effective CGT rate just 10%. 

4. First Home Super Saver (FHSS) Scheme

If you are a first-home buyer, you can save for a deposit via super. Contributions are taxed at the low 15% rate, and when you withdraw, you receive a 30% tax offset on the assessable portion of the withdrawal. 

Important Limits & Exceptions

There are however a few things to consider.

• Division 293: If your combined income and super contributions exceed $250,000, you may pay an additional 15% tax on certain contributions.

• Tax File Number (TFN): Ensure your super fund has your TFN, or you may pay higher tax rates.

• Non-Concessional Cap: Voluntary after-tax contributions (for which no deduction is claimed) are capped at $120,000 annually. 

If you would like to know more about how superannuation can be used to reduce your tax then please contact me paul@congdonfuzi.com.au